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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Nine Entertainment Holdings (ASX:NEC) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Nine Entertainment Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = AU$399m ÷ (AU$4.0b - AU$849m) (Based on the trailing twelve months to December 2023).
Therefore, Nine Entertainment Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Media industry.
View our latest analysis for Nine Entertainment Holdings
In the above chart we have measured Nine Entertainment Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nine Entertainment Holdings .
What Does the ROCE Trend For Nine Entertainment Holdings Tell Us?
Nine Entertainment Holdings has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 40% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
In Conclusion...
To sum it up, Nine Entertainment Holdings is collecting higher returns from the same amount of capital, and that's impressive. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.